Consumers who want to top up an existing loan often wonder how this can be done while maintaining the current monthly rate. Funding a loan at the same rate is generally not a problem. But if you increase the loan amount and the monthly installment is not affected, other credit characteristics have to change:
- Either the top-up loan is granted at significantly lower interest rates or
- Borrowers choose a particularly extended term that is adjusted to the monthly rate.
A significant credit increase with such low-interest rates
That makes an extra extended-term unnecessary will rarely be possible. But you can cope with a slightly less long term if you find a debt rescheduling loan from another bank that is cheaper than the top-up loan.
It is therefore not advisable to take out a top-up loan immediately without exploring the market. This applies all the more if the monthly rate should not be increased, but should be maintained.
First, compare other offers and then decide whether you want to top up the loan with your bank or take out a debt rescheduling loan with another bank.
Top up credit at the same rate: sample invoices
The existing loan was originally concluded for an amount of USD 20,000 with a term of 84 months at an interest rate of 5%.
This results in a monthly installment of 281.64 USD with a total cost of 3657.40 USD. The loan is to be increased to the original loan amount after 36 months, i.e. with a remaining term of 48 months.
If the interest rate is also 5%, the term at the same rate is of course again for 60 months. Seen in this way, nothing changes. The term and rate are the same as when the original loan started.
However, there are changes when the interest rate changes. Since the general level of interest rates has decreased in recent years, an interest rate of only 4.5%, offered as a mixed rate, should apply to the new top-up loan.
If the monthly rate remains the same at 281.64 USD, the term and total costs change in this case:
If the mixed interest rate for the new, increased loan is higher than the original interest rate, the maturities and of course the total costs for the new loan will, of course, be extended at the same monthly rate.
You can also do it differently. You can leave the term of the new top-up loan at 84 months. If the loan is taken out at an interest rate of 4.5%, the monthly charge is reduced to 277.16.
However, the total interest costs are slightly higher than in the previous example. They amount to 3,281.83 USD. The reason is the longer term.
In the next example, you will not only need 20,000 USDos but 25,000 USD. Otherwise, all other assumptions are the same. So you have to increase the original loan to 12,743.79 USD.
If you would like to make do with the original monthly rate of 281.64 USD, the following calculation results:
A normal installment loan has a term of 108 months. The total costs are correspondingly high.
If you stay at 84 months, the monthly rate increases, of course, to 346.46 USD. But you save costs. The total cost is only 4102.26 USD.
Particular problems with increasing credit
The following points should be taken into account for each credit increase:
An increase in credit always means taking out a new loan to replace the existing residual loan. The amount not required for the replacement will be paid out.
Since a new loan is agreed upon, a new credit check takes place. In this context, there are occasional problems, especially with the economic performance of the borrower.
The freely disposable income (income after deducting all expenses) must match the new loan with the higher sum.
If the economic situation has not changed since the existing loan was taken out, it is generally possible to easily increase the amount up to the original amount.
If more credit is to be applied for, problems can arise in individual cases if the disposable income has not increased in the meantime.
For example, the credit rating may have been sufficient for the original loan. If the income situation has not improved, the bank may not be willing to approve a larger amount.
Apart from the question of creditworthiness, there may be other hurdles.
Few banks grant total repayments free of charge. Since the remaining credit is replaced by the top-up loan, prepayment penalties can arise.
The prepayment penalty may not be applied to the entire amount because the bank allows free special payments to a certain extent.
In any case, prepayment penalties increase the borrowing costs only in partial amounts because a slightly higher top-up loan has to be taken out.
The new loan does not necessarily have to be significantly cheaper than the existing loan, even if the interest rate level has meanwhile fallen.
Possible interest rate advantages also depend on how the interest rate for the top-up loan is calculated.
A mixed interest is often formed or the interest rates are split according to loan amounts. In such cases, interest rate advantages are likely to be small, if they exist at all.
In practice, there is sometimes hardly any noteworthy interest rate advantage, especially with large residual amounts from existing loans.
Another point to consider is the different treatment of new and existing customers. Most banks don’t make a difference. All customers receive the same interest rate. But there are exceptions.
If existing customers charge higher interest rates than new customers, the higher interest rate also applies to top-up loans
If the monthly installment should not increase despite a credit increase, this almost always means extended terms. Most banks offer installment loans with maximum terms between 84 months and 96 months.
These terms are often not sufficient if a loan is to be increased significantly at the same monthly rate.
In our second model case, for example, the term for a loan increase to USD 25,000 in 108 months, unless the monthly rate is to increase.
Example: Top up Good Finance credit at the same rate
A loan increase at Good Finance Bank is possible. The best credit can be increased during the term if there is income from work or a pension, at least according to the information provided by Good Finance Bank in the FAQ catalog.
You can submit the application online using the usual online form. Alternatively, the telephone customer service team is available. Use the alternative because there is a lot to clarify.
For clarification, let’s start with the credit characteristics from our second example. At the same rate, an additional loan amount of over 5000 USD should be made available and paid out.
The bank gives the average interest rate from the 2/3 example at 4.99%. Our example assumes 4.5%. That is a realistic value.
- The first question for customer service is whether and on what terms the top-up loan is granted taking into account the current credit rating.
- The second question relates to a prepayment penalty. Good Finance Bank does not offer customers free special repayments or free total redemptions.
Since the existing residual loan will be completely repaid, prepayment penalties will be charged. The compensation is 1.0% for terms longer than 12 months; if the term is shorter, it is still 0.5%.
In our example, the remaining amount to be paid increases from USD 12,256.21 to USD 12,378.77. This means: To increase the financial scope as planned, an additional 122.56 USD must be raised. The new amount, therefore, amounts to 25,122.56 USD.
The total costs at the same rate are now no longer 5319.82 USD, but 5374.69 USD. The term is extended to 108.28 months. Are existing customers treated the same way as new customers? So are you getting the same interest rates?
This is the last question to be answered. It looks like existing customers and new customers receive the same interest rates from Good Finance. In our example, the borrower could actually take out a top-up loan at the same rate.
Interest rates are fairly reasonable and the additional costs caused by prepayment penalties are hardly worth mentioning. Nevertheless, borrowing fails because of the term. At Good Finance Bank, the maximum term is 96 months. If the rate is to remain the same, a term of 108 months is required.